Business Modelling (9): Modelling Intangibles and their Impact
How "soft" factors change, and how they affect performance
An Extension to the Core principles and business models.
This short course is just one of several Extensions you can use on its own or add to other Dynamic Business models, and remember you can also buy the complete set here for a lower total price (opens in a new tab).
What will I learn?
This short course shows how to model "soft" factors, why they change, and their impact. (See the curriculum near the end of this page). We know 'soft' factors matter!A great reputation gets us more business and attracts the best staff; motivated employees give better products and more output; obsolete data makes it hard to support customers; poor processes make the business inefficient. But we can only truly understand the role they play if we model their impact, so we need to answer two key questions:
1. Where do critical intangibles come from, so we can build and protect them?
2. How exactly do they impact other parts of the system and by how much do they affect performance?
What ARE intangibles? Earlier classes dealt almost exclusively with tangible factors - things we can see, touch and easily measure. So intangibles must be something else, and we find 3 standard categories:
Factors concerning the state-of-mind of key groups - reputation with potential customers and staff motivation, for example.
Information-basedfactors - from simple 'data' to more complex 'knowledge'.
Quality-relatedfactors that can be improved - or may deteriorate - over time, such as product reliability or software bugs.
How do intangibles work? The great news is that, when we have identified and specified specific intangibles, we already know how to model them! Since these are all 'things' or 'stuff' (even if softthings or stuff!) they are mostly accumulating stocks, so they behave just like the items we looked at in class 3 - customers, staff, cash and so on. Some, incidentally, are 'negative' factors that do harm if they grow, like customers' annoyance with poor service, or staff stress arising from work overload or poor treatment.
In this class you will learn to model intangible factorsand their impact on the rest of the system - how to define those factors correctly (and yes, they can be measured!), how to capture the mechanisms that cause them to grow or decline, and how to quantify their impact on other factors.
The "RoI" of this course.
Leaders worry endlessly about intangibles, and often spend large amounts on measuring them - but need to know what to do, how much, for how long, to improve those soft factors and estimate the impact of doing so.
Most people immediately think of "state-of-mind" factors when the topic of intangibles comes up - how customers and potential customers feel, as indicated by satisfaction and reputation, or how motivated or stressed employees may be.
Schneider Electric is a global supplier of electrical equipment and systems, from the smallest switches up to power-station units. Its sales success has long relied on its products' reputation for great performance and reliability.
But like many manufacturers, Schneider is threatened by cheap, Chinese competitors. Modelling the drivers of customer gains and losses allows the company to assess the reputational advantage across different product groups. This shows exactly how little they need to compromise their premium pricing in each case, where they would need to launch lower-priced 'fighting' brands, and what this would do to future customer numbers and sales.
State-of-mind factors also featured in the intense competitive battle faced by the GSK travel-vaccine business in our class 7 on competition modelling. The CEO was able to constantly changing tactics to undermine the rival's product credibility in the minds of customers and to hit the motivation of their sales force to promote the product. Both featured in the model, and were actively managed during the 3-month battle by, allowing the CEO to hold down the rate of customer losses and minimise the costly discounting required.
The ability of dynamic models to manage state-of-mind factors in these cases is clearly of huge dollar-value. You should be able to see equivalent value for your own business ... or if you are a consultant, appreciate the value you can offer to your clients with this capability! But state-of-mind factors are not the only intangibles with a big value-impact ...
Information is a valuable intangible. Organisations invest enormously in collecting and maintain simple data. But how much data, about what, at what cost, with what impact on the part of the organisation that uses it? And what do you invest in knowledge and the procedures to ensure each part of the system functions well?
Some quality-factors need direct investment. Items like service quality or response-times may simply reflect, immediately, other items like capacity or staffing. Others must be worked-on and invested-in over long periods, such as improving product reliability or eliminating software bugs - but how much cost and effort, over what time, with what impact?
Who is this course for?
Business leaders Some heads of marketing, R&D, HR - even some CEOs, feel it is so important to get a grip on the quality of their business that they invest effort in modelling it themselves - even a top level appreciation of the model will aid your thinking.
Analysts and accountants. Every analyst supporting a business or functional leader should know how to model the quality of their organisation's resources, and understand how they are changing through time so they can advise leaders on what needs to be done.
Consultants. These models are so powerful that clients will be blown away by the value you bring to their business. It's faster and easier than using spreadsheets and less prone to error. The approach used provides a valuable addition to a consultants toolbox.
Business students (and teachers*) The mechanisms in this course are a critical element of how business works - so understanding them will give you an important additional method for approaching strategic questions - and employers will really value this skill.
*Teachers - we can provide materials from this course for you to use in your classes - contact us for information. Please do let us know where you teach and approximate student numbers in addition to any questions or comments you have.
How long does it take?
Like all of our courses, you do not have to start at the beginning and slave through every lesson to the end - we suggest key items to focus on first. Working carefully through just those key lessons may take about a half-day.
You can then come back to fill in important extra principles and skills. That could be another ½ to 1 day, depending on how deeply you want to get into each lesson and practice it on your own cases – all time that you can claim as self-directed CPD (continuous professional development).
Then, of course, you can spend any time you want on consolidating your skills and following our detailed guidance on how to apply the modelling to your own case and issues.
Why use these models - and when?
Whether launching a new business, tackling a problem or opportunity, or planning for the longer term, surely you would simulate what could happen, just like with other complicated things we do. This lets us:
Design what we might do before we risk serious cash and effort
Test those plans against all kinds of uncertainties (Would you rather experiment with the real world, using real money and people!?)
Manage the business or issue continually against a living model of what will likely happen next.
... and if you want to be really bold and "re-invent your business model" or undergo "digital transformation" it might be best to explore where you are going before you set out!
What is the alternative?
Spreadsheets could theoretically calculate-out everything in a business, but no human could reliably capture a living business system with only rows and columns of numbers to work with.
Balanced scorecards transformed business control by looking beyond the financials! But they do not calculate-out what causes what across the business "machine", and they leave out key issues - like competition! There is no better BSC than a good DBM!
KPI systems often try to be more comprehensive than BSCs, but they often go too far, including every indicator and ratio anyone thinks important. There is no better KPI system than a good DBM!
Business-model canvas and tools like Strategyzer or Leanstack share the same limitations as balanced scorecards and spreadsheets.
Note: If you purchase a single extensions class and then decide to upgrade to the full extensions course we provide a coupon at the end of of the individual classes which can be used to recover the cost of your single class.
Kim is an experienced strategy professional, teacher and publisher of online courses and teaching resources on business modeling
– fast becoming a main-stream capability for executives, consultants and business students. He also offers resources to help model non-business challenges, notably in health-care and international aid.
After senior corporate strategy roles, Kim joined London Business School, to teach on MBA and Executive programs. To overcome serious limitations with standard strategy methods, he developed the powerful strategy dynamics modelling method for designing and managing strategy for any organisation or challenge. Once a specialist skill, building these simulations is now easier, faster and more reliable than spreadsheet modeling. Such models mimic real-world behaviour and performance of businesses and other organisations with uncanny realism.
Kim is author of the prize-winning Competitive Strategy Dynamics (Wiley, 2002), a major strategy textbook Strategic Management Dynamics (Wiley, 2008), and summary e-book now widely used in MBA and executive teaching – Strategy Dynamics Essentials (Kindle, 2011). He is also co-founder of Strategy Dynamics Ltd, which publishes "serious games" and online courses exploiting the user-friendly modelling application, Silico.